hey guys,
I'm new to the forum and also to trading stocks. I've always bought stocks long and just held them (mostly blue chips) but lately i've been wanting to learn more.
I've always known about shorting but am abit confused about the services...i've heard people mention you need to open a margin lending loan account and then some ppl say you don't. Could you guys just lay it down straight for me?
What accounts/services do I need for shorting stocks? how do I go about doing it? Will any old broker provide these services?
Hi Michael
The most common form of shorting equities is through a CFD provider.
Firstly you have to decide on which stocks you want to short and then follow though to see if the provider will actually short the stock for you. Usually most providers will allow shorting on the top 200; therefore pennies are out of the question.
I would suggest a DMA (Direct Market Access) provider over a MM (Market Maker) provider because you have more options (liquidity and beginning, ending auctioning) and no unfair spreading that MM providers have.
You don’t need to open up a separate margin account because the provider will supply the margin for you at a daily interest rate, usually (+/-) 2 % of your open position; therefore you only need to open up an account with them.
CFDs are a good way to diversify your trading strategies but are extremely risky if you don’t have control over yourself and you’re not trading to a plan with a stop loss in place. The buy and hope approach generally won’t work in this environment as fees will accumulate quickly if you are in a Long position for a long time.
As for Shorting, it can be highly rewarding but you do need to do your homework and research first before you get your toes wet.
There are many DMA providers and even on this forum there are a few threads you could begin your research on. Have a read on other people’s opinions and then start the research.
The best way to explain shorting;
Pretend you are a car salesman.
A customer comes in to buy a car, but you realise that this particular car that they want is not in stock.
So you decide to sell them the car anyways, at the price they are willing to pay for it on the same day that they came in to buy it. You sold them the car, sale done.
The next day you go and try to buy this particular brand of car that your customer wants, at a cheaper price than what you sold it to them for. If you succeed to buy it cheaper, than what you sold it for, you deliver the car and make a profit. Great.
The problem arises though if there is no supply out there of this particular car which inturn makes this car harder to buy. When there is no supply, you may end up paying more for the car than what you had originally sold it for because you are already committed towards the sale to your customer. You then lose money on the transaction.
The next time you decide to sell short again you thoroughly do some homework in the areas of supply and demand.
I hope this is beneficial.
SGB